We have some idea now what happens when stimulus programs are instituted. But what we don’t know and will soon find out is what happens when these programs are ended. No doubt the predictions will be very wrong again

In the story entitled Silver Blaze, the great detective Sherlock Holmes draws attention to "To the curious incident of the dog in the night-time." His companion complains that the dog did nothing in the night, which Holmes points out is the curious incident. This is basically the real question about the world economy in 2013. What was interesting was not what happened, but what didn’t happen.

The prime example is in the US. Last year, weeks before new year, news was saturated with the horror of the so called “fiscal cliff”. The fiscal cliff was the combination of two deadlines that were to occur simultaneously on 1 January 2014. The first was the expiration of certain tax cuts. These tax cuts of the so-called Bush era had been in effect since 2001. During the financial crisis, certain mandatory contributions to the US national pension plan, social security, had been suspended and the suspension was due to end. If dramatic tax rises weren’t enough, an agreement that mandated automatic budget cuts was due to go into effect on the same day. The combination of a tax increase and the beginning of what is basically an austerity package was supposed to be so dramatic, that the impact on the US economy would have been catastrophic.

It didn’t happen. Neither the US economy nor the markets were hurt. In fact it was the beginning of one of the largest rallies of US equities. At the last minute, a deal was worked out that allowed some taxes on the very wealthy to rise while the pension contributions by everyone else were reinstated. The austerity package was put off for three months, but it had no effect. The American economy continued to improve. The predictions were wrong.

The next part of the government drama in the US occurred in October 2013. The Republicans, the opposition party in the US, threatened to shut down the government in an attempt to stop the new universal health care in the US, known generally as Obamacare. They also threatened to allow a default on US debt. Again the forecast was for all sorts of economic chaos.

Sure enough, the Republicans did shut down the government for almost two weeks, but once again there were few, if any, negative effects. The US equity market pulled back for about a day then continued to break new records.

But the issues concerning US fiscal policy were dwarfed by the US monetary policy. The real power behind the global equity market rally was the US Federal Reserve (Fed). Their bond buying program, known as QE, was started in September of 2012. In May, the chairman of the Federal Reserve, Ben Bernanke, suggested that the program would be tapered and eventually end. The markets panicked; equity markets along with several emerging market currencies plunged in June until soothing words from the Fed members were able to calm them for a while.

Again the markets thought that the taper was supposed to start in September. When the Fed surprised the market by putting it off, the markets resumed their rise with the assumption that nothing would happen until March of 2014. But the Fed surprised the markets again by announcing the taper in December 2013.

What didn’t happen after the taper announcement was a market correction. All year on any hint of tapering the markets declined, but after the announcement US markets rallied 3% to all time highs; European markets did the same and the emerging markets didn’t fall apart as they did in June.

Outside of the US, predictions were especially poor for Europe. Earlier in 2013 forecasts for Europe were exceptionally gloomy. There was supposed to be slight growth in France and Germany and a contraction for the Eurozone as a whole. The recession was supposed to hit the peripheral countries like Greece, Spain and Portugal particularly hard. Despite these predictions the Greek stock market is up almost 70% and their bonds have been outstanding performers. Both Spain and Portugal are growing; contrary to the predictions, Italy and France are not.

A perennial favourite over the past few years was gold. The idea was that with central banks printing trillion of dollars, euros, yen and yuan, inflation had to go up. Not so. Gold fell by 30% as interest rates generally rose and inflation remained tame. Commodities also drifted lower by about 5%.

Record prices for equities would seem to indicate record growth in corporate earnings. This has not happened. The forecasts in May were for 5.1% growth for the third quarter. CEOs managed to get those forecasts reduced to 2.1% growth but basically earnings for the third quarter were flat. Also despite the lacklustre growth in the world economy, corporate defaults for US and European junk bonds was just 1% above the average during better economic times between 2005 and 2008.

So what really happened? What went wrong with all of these forecasts? Why all the happiness when the background looked pretty bleak? While pundits, including myself are no more accurate than anyone else, it would seem that the economists and financial analysts might just be able to get somewhere near truth, rather than nowhere close.

There does seem to be on common denominator: massive stimulus programs. The size of these programs, not just in developed countries, but all over the world is unprecedented. In addition, these programs were and still are experimental. Their impact in one country like the US has created some surprising effects. Their impact outside of the US has also been unexpected.

So now we have some idea what happens when these programs are instituted. But what we don’t know and will soon find out is what happens when these programs are ended. No doubt the predictions will be very wrong again.

(William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first-hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and has spoken four languages.)